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Do Banks Satisfy the Modigliani-Miller Theorem?

Aboura, Sofiane; Lépinette, Emmanuel (2015), Do Banks Satisfy the Modigliani-Miller Theorem?, Economics Bulletin, 35, 2, p. 924-935

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EB-15-V35-I2-P95.pdf (139.9Kb)
Type
Article accepté pour publication ou publié
Date
2015
Journal name
Economics Bulletin
Volume
35
Number
2
Pages
924-935
Metadata
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Author(s)
Aboura, Sofiane

Lépinette, Emmanuel
Abstract (EN)
The capital structure of banks has become the focus of an extended debate among policymakers, regulators and academics. The seminal Modigliani-Miller (1958) theorem is seen as supportive of regulators' drive to require higher equity capital to banks. This raises the question on to what extent does Modigliani-Miller theorem hold for banks. This article brings a new insight of the Modigliani-Miller theorem by considering the implicit government guarantee offered to banks. Our theorem shows that a bank does not satisfy the Modigliani-Miller theorem. The main result indicates that banks will favor leverage instead of equity.
Subjects / Keywords
Modigliani-Miller; Leverage; Banks; Regulation
JEL
G3 - Corporate Finance and Governance
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G28 - Government Policy and Regulation

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